The Corner

It’s Never a Great Morning . . .

. . . when you (almost) agree with Krugman.

He is right about this:

The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.

All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst.

What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years.

Congress’s new stimulus may not work, then, because we’re still not dealing with the original problem. Too many people still owe too much money, and the nation’s financial institutions haven’t been able to clear out the mess so that we can go on with life.

Here’s another problem: Does anyone think that Congress will be able to hold this “one-year” holiday on a portion of Social Security taxes to just one year if unemployment, come Christmas 2011, is still closer to 10 percent than to 5 percent? Politically, it’s going to be hard for members of either party, ahead of an election, to start taking more cash out of people’s paychecks.

Congress could extend the payroll-tax break for another year — that is, to when the Bush tax cuts re-expire. The payroll-tax holiday, then, would be indefinitely tied to the Bush tax cuts, taking us in the wrong direction on entitlement programs.

— Nicole Gelinas is contributing editor to the Manhattan Institute’s City Journal.

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